A1457 Cooperatives: Principles and practices in the 21st century Kimberly A. Zeuli and Robert Cropp ABOUT THE COVER IMAGE: The “twin pines” is a familiar symbol for cooperatives in the United States.The Cooperative League of the USA, which eventually became the National Cooperative Business Association (NCBA), adopted it as their logo in 1922.The pine tree is an ancient symbol of endurance and immor- tality.The two pines represent mutual cooperation—people helping people. C OOPERATIVES: C Publication notes ii ont Chapter 1 1 An introduction to cooperatives Chapter 2 5 ents Historical development of cooperatives throughout the world Chapter 3 15 Cooperative history, trends, and laws in the United States Chapter 4 27 Cooperative classification Chapter 5 39 Alternative business models in the United States Chapter 6 49 Cooperative roles, responsibilities, and communication Chapter 7 59 Cooperative financial management Chapter 8 69 Procedures for organizing a cooperative Chapter 9 77 A summary of cooperative benefits and limitations Notes 81 Glossary 85 Cooperative resources 89 PRINCIPLES & PRACTICES IN THE 21ST CENTURY i Kimberly Zeuli and Robert Cropp, Assistant Publication notes Professor and Professor Emeritus in the This publication is the fourth and most extensive Department of Agricultural and Applied revision of the Marvin A. Schaars’ text, Cooperatives, Economics, University of Wisconsin—Madison, Principles and Practices, University of Wisconsin are responsible for all of the editing and most Extension—Madison, Publication A1457, July 1980. of the revised text. The following individuals What has come to be known simply as “the also contributed to various chapters: Schaars book,” was originally written in 1936 by David Erickson, Director of Member Relations, Chris L. Christensen, Asher Hobson, Henry Bakken, Wisconsin Federation of Cooperatives R.K. Froker, and Marvin Schaars, all faculty in the E.G. Nadeau, Director of Research, Planning and Department of Agricultural Economics, University Development, Cooperative Development of Wisconsin—Madison. Since its first publication, Services the Schaars book has served as a basic reference for cooperative members and leaders, cooperative David Trechter, Professor, University of Wisconsin— instructors and development specialists, and River Falls students of cooperatives throughout the United Richard Vilstrup, Professor Emeritus, States and world. It has been translated into Department of Animal Science and several languages. Agricultural and Applied Economics, Although the Schaars book has been out of print University of Wisconsin—Madison for some time, the University of Wisconsin Center This revision would not have been possible for Cooperatives (UWCC) continues to receive without generous funding from The Cooperative regular requests for copies. Its straightforward, Foundation, Inver Grove Heights, Minnesota. basic information on the organization, structure, financing, and management of cooperatives is as needed and relevant today as ever.The revisions in this version, which reflect over two decades of learning about cooperative development as well as new cooperative laws and ways of doing business, will hopefully make it even more useful. Although we focus on cooperative businesses in the United States, and draw most of our references from the agricultural sector, most of the book’s content is pertinent to cooperatives anywhere, in any sector. Readers are encouraged to seek out other publications that deal more extensively with cooperative laws in their own states and countries, and provide more detailed information on consumer, service and worker-owned cooperatives and credit unions. ii C OOPERATIVES: CHAPTER 1 An introduction t roups of individuals around the world and According to the International Co-operative throughout time have worked together in Alliance (ICA): a cooperative is an autonomous asso- Gpursuit of common goals. Examples of coop- ciation of persons united voluntarily to meet their eration, or collective action, can be traced back to common economic, social, and cultural needs and our prehistoric predecessors who recognized the aspirations through a jointly owned and democrati- advantages of hunting, gathering, and living in cally controlled enterprise. Cooperative leaders groups rather than on their own. around the world recognize the ICA, a non-govern- mental organization with over 230 member organ- Although the word “coopera- izations from over 100 countries, as a leading tive” can be applied to many authority on cooperative definition and values.2 different types of group activities, in this publication The ICA definition recognizes the essential the term is used to reference element of cooperatives: membership is voluntary. a formal business model, Coercion is the antithesis of cooperation. Persons which has relatively recent compelled to act contrary to their wishes are not origins.The earliest coopera- truly cooperating.True cooperation with others tive associations were arises from a belief in mutual help; it can’t be created in Europe and North dictated. In authentic cooperatives, persons join o coopera The first signs of America during the 17th and voluntarily and have the freedom to quit the coop- organized hunting 18th centuries.These associ- erative at any time.3 The forced collectives preva- activity based around communities are ations were precursors to lent in the former Soviet Union, for example, were associated with cooperatives.The pioneers not true cooperatives. Homo erectus, of the Rochdale Society in modern human Another widely accepted cooperative definition is 19th-century England are ancestors who lived the one adopted by the United States Department between 500,000 and celebrated for launching the of Agriculture (USDA) in 1987: A cooperative is a 1.5 million years ago modern cooperative in Africa. user-owned, user-controlled business that distributes movement.The unique con- tiv benefits on the basis of use.This definition captures tribution of early cooperative organizers in what are generally considered the three primary England was codifying a guiding set of principles cooperative principles: user ownership, user es and instigating the creation of new laws that control, and proportional distribution of benefits. helped foster cooperative business development. Today, cooperatives are found in nearly all coun- The “user-owner” principle implies that the people tries. Chapters 2 and 3 trace the remarkable history who use the co-op (members) help finance the co- of cooperative development internationally and in op and therefore, own the co-op. Members are the United States. responsible for providing at least some of the cooperative’s capital.The equity capital contribu- tion of each member should be in equal propor- What is a cooperative? tion to that member’s use (patronage) of the co- The cooperative model has been adapted to op.This shared financing creates joint ownership numerous and varied businesses. In 1942 Ivan (part of the ICA cooperative definition). Emelianoff, a respected cooperative scholar, The “user-control” concept means that members of remarked that “the diversity of cooperatives is kalei- the co-op govern the business directly by voting doscopic and their variability is literally infinite.”1 As on significant and long-term business decisions a consequence of this diversity, no universally and indirectly through their representatives on the accepted definition of a cooperative exists.Two defi- board of directors. Cooperative statutes and nitions, however, are commonly used. bylaws usually dictate that only active co-op members (those who use the co-op) can become voting directors, although non-members some- times serve on boards in a non-voting, advisory PRINCIPLES & PRACTICES IN THE 21ST CENTURY 1 capacity. Advisory directors are becoming more Co-op benefits may include better prices for goods common in large agricultural cooperatives in the and services, improved services, and dependable United States, where complex financial and sources of inputs and markets for outputs. Most business operations require the expertise of finan- cooperatives also realize annual net profits, all or cial and industry experts. Only co-op members can part of which are returned to members in propor- vote to elect their board of directors and on other tion to their patronage (thus, they are aptly called cooperative actions. patronage refunds). Cooperatives can also return a portion of their profits as dividends on investment. Voting rights are generally tied to membership In the United States, however, federal and most status—usually one-member, one-vote—and not state statutes set an 8 percent maximum on to the level of investment in or patronage of the annual dividend payments.The purpose of these cooperative. Cooperative law in a number of states limits is to assure that the benefits of a cooperative in the United States and in other countries, accrue to those who use it most rather than to however, also permits proportional voting. Instead those who may have the most invested; the impor- of one vote per member, voting rights are based tance of capital is subordinated. on the volume of business the member transacted the previous year with the cooperative. Generally, Today, some co-op leaders and scholars consider however, there is also a maximum number of votes this dividend restriction arbitrary and harmful to any member may cast to prevent control by a cooperatives. From their perspective, the 8 percent minority of members. For